Traffic toll: how traffic congestion shapes corporate cash holding policies

This study examines how traffic congestion influences corporate cash-holding policies. We find that firms headquartered in more congested areas hold significantly higher cash reserves. This effect is stronger for firms with operations concentrated near their headquarters and for those in industries with high in-person requirements, but weaker for those located in states with greater transportation infrastructure investment. Using a formal mediation framework, we show that traffic congestion increases precautionary cash holdings by disrupting firms' outbound and inbound logistics, thereby increasing the uncertainty surrounding operating cash inflows and procurement costs. Further, we find that higher abnormal cash holdings mitigate the adverse effects of traffic congestion on future firm performance, are associated with greater subsequent capital expenditure, and are valued more highly by investors. Collectively, our findings highlight how firms adjust their liquidity policies to manage the persistent operational frictions created by traffic congestion.